Thomas Tooke

Archive for the ‘The Greenback inflationary period’ Category

How did Gold track commodities during the Greenback period?

In Commodities, The Greenback inflationary period on August 12, 2012 at 8:05 pm

How Gold and commodities evolve one against the other in a paper standard. There is fortunately a precedent which is quite instructive, and this precedent is the Greenback era. There are plenty of interesting statistics. Wesley C. Mitchell provides a context of price fluctuations between commodities and Gold. As we will see, in fact Gold and commodities have move in tandem with the Gold price anticipating the increase in price and being sensitive to political developments.

In the tables below, Mitchell provides a range of commodities price in deciles and measures if the Gold is above or below the median increase in commodities price. Non surprisingly, as a commodity form of money Gold evolves in the middle of the distribution of commodities prices.

As we can see initially, Gold races off faster than commodities, as the range of price by the end of 1862 climbs between the 6th and 8th decile of commodities.

As we can see after a flare up in January 1865, Gold starts to lag commodities for the rest of 1865.

While the Greenback standard is referred as a high inflationary period, in fact it is nothing compared to today´s situation as the government debt to GDP stood at only 50% at the top of the war. Had the war lasted longer though, the currency would probably have been destroyed. It is notable to see the price of Gold contract, however one should know the events related to this lower price of Gold in paper. McCulloch implemented his policy of contraction in 1866.

As one can see, the policy of repaying the debt and contracting the currency made price lower. This type of deflation was not a debt-derangement deflation event, but a reduction of the circulation in order to reward those who had carried the greenback and had suffered dear prices. (How different times! Today, which politician would care about rewarding the savers in paper money, only Volcker cared!). 1873 is marked by a global contraction and the demonetization of Silver, hence cash is getting harder on top of the policy implemented. In fact in 1873, in order to fight a bit the effects of the contraction, more greenback were issued.

The year 1874 is marked by a slight rebound in Gold price from the contraction days of 1873. However the policy of contraction is maintained until 1879, when the Gold is brought back to its initial parity with paper and the convertibility is restored.

Inflation as a monetary phenomenon during the greenback period.

In Monetary depreciations, The Greenback inflationary period on June 9, 2012 at 8:48 pm

As Mitchell wrote in 1908:

“When two countries have similar monetary systems and important business relations with each other, the movements of their price-levels as represented by index numbers are found to agree rather closely.”

This comment from Mitchell raises the question about the very different inflation indexes between Hong-Kong and the US despite sharing the same currency in the last question. Obviously the method of computation of those indexes include different items.

“This agreement is so strong that similarity of movement is usually found even when comparisons are made with materials so crude as index numbers compiled from unlike lists of commodities and computed on the basis of actual prices in different years.  It is therefore a highly significant fact that the  movements of the price-level in the United States during the years of the paper standard were almost wholly unlike the contemporary movements of the price-level in England and Germany. ”

“To facilitate comparisons between the movements of the price-levels in these three countries, Professor Falkner had Sauerbeck´s English table, and Soetbeer´s German table recomputed on the basis of his own American table — namely, actual prices in 1960 == 100. The results — reproduced in Table 6 — show a general agreement between the English and German index numbers and marked differences between both of these index numbers and the Americna index numbers during the period of the greenback standard. These differences are greatest during the years of high premiums on gold and decline with the premium as the date of  resumption is approached. After resumption, indeed, the figures indicate a closer agreement between relative prices in the United Sates and Germany than between relative prices in England and Germany. ”

The link between gold prices and commodities.

In Commodities, The Greenback inflationary period on June 9, 2012 at 3:25 pm

In the 1913-1920 massive stagflation that the US witnessed, the Gold price was artificially tied to the paper. The bullion was not freely shipped overseas, the specie was moved out of the circulation and sequestered in the central bank for “patriotic motives”, so the Gold price was artificially repressed downwards. This created massive problems in the late 1920s, forcing a sharp devaluation in the US against Gold. The problem was recognized as early as 1920 by economists like Kemmerer who advocated for a new price of Gold in order to restore the ratio of the monetary base and deposits to the Gold reserves. This has been discussed in previous posts. So in the 1913-1920 episode commodities and Gold had their separate ways because of a repressed system and artificial low parity of Gold. We had again the same in the Bretton Woods episode, an artificial parity which proved non sustainable either because the principle advocated by the currency school were not followed.

In the greenback episode, we have an interesting way to check the link between commodities and Gold.  In that period, the rest of the world was in the last days of a bimetallic standard in France, and on a Gold standard in the UK. At the same time commodities were freely traded and measured in greenback, also Gold was freely traded against the greenback.

Mitchell in 1908 provides an interesting study about the link between Gold prices and Commodities during the greenback episode.

” The one topic which can be treated on the basis of these tables is the connection between the fluctuations of the price of gold and the fluctuations of the price of gold and the fluctuations of the relative prices of commodities and labor. And this topic, of course, cannot be taken up until the tables of relative prices and wages have been presented. ”

” On studying the table on finds that the wholesale price-fluctuations of 1860-1880 were characterized (1) by extraordinary diversity in the degree of rise and fall of different commodities, and (2) by a strongly market upward trend culminating in January, 1865, and a strongly market downward trend culminating in July, 1879. Both of these characteristics require analysis. ”

” Some commodity had a relative price less than 100 on every date except January, 1866, and some commodity stood above 300 every date after 1861. ”

Mitchell continues:

“The narrowest range after 1861 was 259 points in the scale of relative prices (October, 1870); the widest range was 1321 (July, 1864, when cotton had a relative price of 1410); and the average range was 422.5 points. The extremely high and extremely low relative prices are shown, however, but few commodities. Four-fifths of the list are distributed over an average range of 94.4 points- less than a quarter of the average range of 94.4 points-less than a quarter of the average extreme range:– and two-fifths over an average range of but 33.7 points.

Analyzing the three phases of the Gold price during the Greenback period

In The Greenback inflationary period on June 3, 2012 at 8:41 pm

As Mitchell wrote:

“These summary tables and the chart show the existence of four clearly differentiated periods in the fluctuations of the premium during the 17 years of the greenback standard of value. The first period begins with the suspension of specie payments and ends in April, 1865 with Lee´s surrender. It is characterized by violent fluctuations in the price of gold and high average premiums. The second period extends from May, 1865, to “Black Friday,” September 24th, 1869. During these years the gold market was on the whole quieter than it had been during the war, the premium averaged much lower than in 1864 and the early months of 1865, and the range of fluctuations was narrower – even in 1866, the year when McCulloch´s policy of contraction was checked and when London suffered the Overend-Gurney panic, and in 1869, the year of “Black Friday.” But despite many temporary ups and downs there was no permanent reduction of the premium within this period; for the average gold quotation of its first month was 135.6 and of its last month 136.8.

The third period begins October, 1869, and extends to March 1876. This period, when compared with the second, is characterized by a much lower average premium and a narrower range of fluctuations; but it is like the second in showing no permanent reduction of the premium within its own limits. The average premium for the last year, 1875, is the same as the average for the first year, 1870. Doubtless the generally lower level about which the premium fluctuated during these years was due mainly to the improvement in the financial credit of the government caused by the “public credit” act of 1869, by successful refunding operations, and by the reduction of the principal of the public debt. That no progressive decline of the premium took place between the beginning of specie payments seemed as remote in 1875 as it had seemed in 1870. The resumption act bears the date of January 14th, 1875, to be sure; but current comment of well-informed journals shows that at the time of its enactment it was not taken seriously by the public. One interesting feature of this period is that the great crisis of 1873 led to a sharp fall of the premium, despite the fact that the Secretary of the Treasury reissued $26,000,000 of greenbacks which had been withdrawn by Secretary McCulloch. The final period in the history of the paper standard extends from April, 1876, to the resumption of specie payments on January 1st, 1879. It is characterized by an almost unbroken decline in the premium on gold and a narrow range of fluctuations. The reason for this decline- at least after March 1877, when John Sherman became secretary of the treasury — is obviously found in the effective preparations to execute the resumption act of 1875, and the fortunate turn of foreign trade which facilitated Sherman´s operations.”

A few comments. It is interesting to note that in the United States clearly, we are talking about a reduction of the debt, while the debt keeps increasing. On the other hand it seems increasingly likely that politicians of both sides are really unwilling to limit their own power by limiting government expenditures. In Europe however, Germany is clearly serious about reducing government expenditures, even though in reality all governments around the world are increasing their debt levels, which is still fundamentally a positive for precious metals. Policies of contraction are not considered, no central bank is currently increasing rates or willing to diminish seriously the stock of government debt. The policy prescription is inflating away. So in that context, it is hard to envision how we are at the beginning of the decrease in premium of Gold to paper. Finally it should be noted that the escalation of war with Iran is a real possibility, which is also very positive for Gold.

The impact of the crisis of 1873 is very interesting, and it is very similar to what happened in 2009 with Gold. In fact it seems that while the quantity of greenback was increased the Gold price when down. It is to be remembered that Gold could not be spent at the time, so a large crisis is making people in need of liquidation to get means of payment. A debt crisis forces economic agents to reach for cash. What was true then is still true today!!

Complete list of prices of Gold in greenback year by year from 1862 to 1878

In The Greenback inflationary period on May 27, 2012 at 6:44 pm

Here are the tables.

December 30th 1861, end of specie conversion, Gold price trading immediately at a premium to paper.

In The Greenback inflationary period on May 27, 2012 at 6:07 pm

It seems that whenever Governments want to announce something which is going to displease the population, they do it at times when the people are suspecting the least, usually holidays periods are fair game. Wesley C. Mitchell wrote an excellent books with plenty of statistics which are very instructive about the set of price movements between Gold and Paper, Paper and commodities. This is a interesting set of data because the rest of the world is on a Gold Standard, and essentially there is no inflation in other countries, the United States´ price history under a paper standard operates a little like as an economic Lab as a result.

From Mitchell´s writing:

[…]

When the New York banks suspended specie payments on Monday, December 30th 1861, gold coin at once commanded a premium in paper money. For two weeks there was no organized market for gold; but people who desired to buy or sell coin resorted to the brokers in foreign money. On the 13th of January, however, the New York Stock Exchange began dealing in gold, a step which put the resources of a highly organized market at the disposal of those who wished to buy or sell coin or to speculate in “futures”. Dealing in gold continued on the Stock Exchanges until June 21st, 1864, when the short-lived law prohibited sales of gold outside of brokers´ offices became effective. After this law was repealed transactions on the Stock Exchange were not regulated resumed, except for a brief period in October, 1869 when the Gold Exchange was closed because of the liquidation following “Black Friday.”

Meanwhile other organized markets had been established. (1) The “Open Board” of stock brokers was a younger rival of the “regular” Stock Exchange, and like the latter added gold to the list of commodities dealt in. Its separate existence came to an end in 1869, when it was united with the Stock Exchange. (2) The “Evening Exchange” began informally when a number of men formed the habit of meeting in the corridors of the Fifth Avenue Hotel to continue speculating after the day exchanges had been closed. An enterprising Mr. Gallagher opened a luxurious room for the use of this company opposite the hotel in March, 1864. Here gold, together with railway and petroleum stocks, was bought and sold until midnight. This exchange was regarded with disfavor by many business men, ostensibly because speculating both night and day was detrimental to health and morals. After the discovery of the Ketchum gold-certificate frauds in August, 1865, the banks and the other exchanges united to suppress trading at night, by forbidding their members to frequent Gallagher´s room. Accordingly the Evening Exchange was closed. (3) The market known popularly as the “Gold Room” and formally as the the “New York Gold Exchange” grew out of the operations of a knot of men who began in 1862 to buy and sell gold in a basement in William Street. As the numbers and prosperity of the company increased, they moved the “Gold Room” several times to obtain more commodious quarters. After the Stock Exchange dropped gold from the “call list” in June 1864, the “Gold Room” became the most important market for gold in the country and continued such until specie payments were resumed January 1st, 1879. At first its organization was very loose; but in October, 1864, it adopted a constitution and by-laws, and began to elect regular officers. May 1st, 1877, it affiliated with the Stock Exchange, and was thereafter styled “The New York Stock Exchange, Gold Department.”

How was the inflation period of the greenback episode compared to 1913-1920? An answer from Kemmerer

In Commodities, The Greenback inflationary period on May 1, 2012 at 12:22 am

Kemmerer compares the 1913-1920 inflationary period to the Greenback episode. Here is what he wrote in 1920.

[…]

The maximum depreciation of the American greenback in terms of gold during our period of suspended specie payments was registered on July 11th, 1864, when gold dollars were quoted at a price of $2.85, giving the greenback dollar a gold value of only 35.09. We hear much of the greatly inflated paper money prices of the Civil War period, and yet despite this decline of the gold value of the dollar to a low point only slightly more than one-third of par, the maximum increase in wholesale prices during the period of suspension, 1861-1878, was but 116%. This is a smaller advance than that represented by the present wholesale prices in the United States, as compared with 1913, the average increase to April 1920 — the latest date for which Government figures are available — having been 165 per cent. In purchasing power over commodities at wholesale, our currency is therefore more depreciated today relative to 1913 than was the inconvertible greenback of the Civil War days at its worst; namely, in 1865 as compared to 1861.

[…]